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Originally Posted by Broken Arrow
The debate over "smallest balance first" versus "high interest first" seems so sticky at times due to so many little variables at play that varies from individual to individual.
One of those variables that I also think is worth considering is how much can one set aside for debt elimination? I've heard that some were so tight on their budget that they believed they had no choice but to pay off the smallest first.
Those who can afford $100 extra a month (at the very least) just for the sole purpose debt reduction may be better served to focus more on high interests first.
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The three options for debt reduction seem to be:
1/ The traditional idea of debt consolidation at a lower interest rate.
2/ Pay off the highest interest rate debt first.
3/ Pay off the shortest term loan first.
Each of these strategies have good points and bad points. I've been researching and developing software that will do comparisons of these strategies for people. It's early days but a few things are already becoming clear.
All three options have advantages provided you know what you are doing and why.
For fast removal of debt, option 3 where you pay off the smallest loan and then then put the payments against the second smallest loan seems to be the fastest and cheapest option.
Option 2 works almost as quickly depending on the lengths of the loans.
Option 1 where you refinance has the advantage of reducing the overall interest rate. Unfortunately it is very easy to allow short term ebt such as credit card debt to turn into long term debt using this option.
I look forward to in a few months time when it will be easier to look at a situation and give exact options.
I know at one time I nearly ruined my cashflow when I was trying to pay off too many things at once.
Enjoy Your Money
The Budget Man
www.PersonalityBudgeting.com
The budget system that works